How can big businesses combat the disruptive startups and innovators now entering the food industry?

In my previous article, we discussed the changing macro environment of the food industry, and looked at how this could explain why large global organisations may be finding themselves in declining revenue. Now we shall consider what these companies can do to combat this, and adjust to meet the challenges of this new world.

As we discussed, smaller players have taken advantage of market changes at pace due to their agility and unique culture of innovation with value and profit both being a priority. Large companies whose aim is to achieve a repeatable outcome for the customer must sacrifice elements of the above in order to do so. Some argue that the conundrum will always exist, simply that established companies will always lack enough flexibility to explore and nurture breakthrough innovation.

Let us explore this a little…

The most obvious solution would be to simply buy smaller companies with innovative solutions and USP-rich products. This is an effective model and one that Kellogg have adopted with their £100m Eighteen94 Capital fund. Or similarly, Australia’s Lion Brewery’s purchase of several niche craft beer brands. There are of course many other examples.

It must be considered that this does not provide the solution for all. Not every large organisation has the liquidity, internal capability, or relevant industry position to apply such a strategy. Buying companies can also dilute, disconcert, and even disprove the formula that made the original company successful in the first place. Not only this, but integrating systems and business processes may even serve to stifle the innovative culture of the purchased company. This is not to mention the cost of the acquisition and the related fees. It is not to say that this type of activity cannot be successful, it is only that there are legitimate questions for consideration, and therefore we must consider that there are other approaches. Also, to refer to the original challenge, it does not provide the answer as to how larger companies can buck the trend and begin to harbour innovation for themselves…

A possible solution could be to set up a business unit within a large organisation, with the aim of competing with start-ups over the ideas of tomorrow. This requires some real thought as to how best to facilitate on the one hand; the business unit’s best hope for improvement may come through incremental innovation, or be focused on discontinuous innovation; being the radical advances that alter the basis for competition in an industry. The two approaches require two different types of business systems, processes, talents and cultures in order to succeed.

That is not to say it is not an option which is worth considering. Govindarajan and Trimble argue that setting up ‘NewCo’ within ‘CoreCo’ can achieve success, as long as NewCo is able to do three key things in relation to CoreCo:

FORGET. NewCo must forget CoreCos predictable business model, behaviours and even the perception of CoreCo’s image. This is particularly in relation to recruitment and selection, and what defines success. Acknowledging the need to challenge institutional memory and metrics of performance will allow this to happen. NewCo cannot hope to achieve disruption in a system with a process which is aimed at tracking and facilitating incremental gains and predictability. Indeed, it could even be observed that CoreCo is designed to discourage such innovation.

BORROW. NewCo is not a new company and should use this to their advantage when competing against their Start Up rivals, harvesting all it needs from CoreCo. Obvious examples may be relationships and contacts with suppliers or retailers, but capital funding and more specific expertise are also very relevant. Interestingly, if NewCo has successfully applied this Forget principle, it will likely lay outside of CoreCo’s communication systems and even their cultural tendencies; making interactions between the two disjointed and potentially tense. It is the management team’s responsibility to facilitate this process and avoid possible resentment from CoreCo which could stifle the progress of NewCo. Put plainly, the two business units will not talk the same language and mediation will need to incur.

LEARN. The pursuit of discontinuous innovation by definition cannot be structured, tried and tested, or even rigorous. It is the stuff of ‘midnight eureka moments’, hours of idea development and brainstorming, trials and tribulation, and even some sweat and tears. However, the misconception here is that NewCo does need to apply structure and rigour when reviewing and instigating learnings of an action; this could be a product trial, launch, the measuring of success, the hiring of talent, etc. Learning with effect and pace, and applying learnings with the same rigour will be key to achieving success. A key way to understand this from a management perspective is to focus on the team’s ability to learn, and not necessarily the outcome’s success. Disruptive innovation will have many failures along the way by its very nature. Therefore, adherence to business plans, checking balance scorecards, budget measures and standard operational KPIs will not give clear indication of the likelihood of end success.

Breakthrough innovation is both high risk and also high reward. It is ambiguous, immeasurable, scary, complex and all the other relevant superlatives. A strategic framework that harbours an environment where it can succeed will mitigate some of the risk and cost of the failures. The question will always remain; can big business really afford not to?

Recent studies show us that growth in the top food companies is in decline, while smaller players are recording the opposite. In fact, revenue of the top 50 FMCG companies has declined from a 7.4% growth rate in 2010 to 1.7% in 2014, while growth in smaller organisations has risen to 1.9%.

Why is it that, during a time in which the industry is seeing a decline overall, the smaller companies have been able to outgrow their larger competitors? Not only this, but specific brand research has shown that local products have grown by 6.2% compared to their global counterparts, who could only grow by 3.2%. Statistics aside, we must understand what the possible underlying causes are. Put simply, why might large scale food organisations be losing out?

A first possible cause is the impact that technology is having on the individual, who is now being given so many choices. Technology has moved from a vertical industry to an all-encompassing layer which has spread throughout society. A significant effect of this is that we have never before had such high levels of visibility when it comes to a company’s true operating model. This information can be used to assess their moral compass, and their impact on social and environmental issues. No longer are matters regarding the climate, equality and sustainability clouded, which previously allowed these factors to remain on the periphery of an organisation’s agenda.

Technology’s impact on the industry is profound in many ways. Another key change is the way in which technology has levelled the playing field for smaller companies to market and sell their products. Social media platforms allow a low barrier to entry for smaller companies to gain an unprecedented amount of brand exposure. The Dollar Shave Club is a good example of how a viral advert can contribute to exponential growth.

Another factor that might explain the declining revenue of large companies is the age old truth that big corporate companies are slow to react to market trends and unique opportunities. They are bureaucratic, reasoned in their decision-making processes, cautious by nature, and are often governed by shareholder returns. This leaves an unoccupied space for entrepreneurs to gain ground, innovate, renovate and risk take, without the reputational damage, consequences and repercussions feared by bigger brands. While this observation is not necessarily new, it has certainly been compounded by a globalised world operating at a faster pace than ever before.

What may also exacerbate this fact is the new and unique direction some entrepreneurs have taken. The millennial, as both an employee and increasingly a CEO, is guided by value and principle more than any other generation. What this may be leading to is a different perspective on the world of opportunity that big and well-established companies are simply not programmed to identify due to overwhelming focus on profits. Opportunities where both value AND profit are the focal points have led to some disruptive breakthroughs and future growth markets in fascinating ways. The US based company Hampton Creek provide a good example of this – the owners sought to replace the eggs in food supply chains by developing plant-based alternatives for use in everyday products such as mayonnaise and even cookies, reacting to an increasingly health-conscious consumer base who are looking for ‘free’ alternatives to their old store cupboard favourites.

Returning to the topic of transparency in practices, a recent Oxfam report on the ethical credentials of the top food companies did comment that 9 of the 10 biggest food organisations had improved their practices from the previous year. However, Oxfam added that: “It will take time for them to reverse a 100-year history of relying on cheap land and labour to make mass products at huge profits but at high cost to social and environmental factors”. We must also consider the question of whether these incremental improvements go far enough to harbour the next wave of innovation. They could then go a long way to really tapping into the next generation’s need for value-driven economics.

Clearly there are some challenges which large companies are facing in order to maintain their current position, revenue and market share. In my next article I will address what large organisations could do to address these challenges.